- A reverse mortgage is for homeowners age 62 or older who want to tap into their home equity.
- The lender pays you money based on how much equity you have in the home.
- You can get reverse mortgage payments in one lump sum, as monthly payments, or as a line of credit.
If you’re 62 years or older, you might be eligible for a reverse mortgage.
These types of mortgages aren’t for everyone, since they take equity out of your home and must be paid back when you sell the home or die. For example, a reverse mortgage probably isn’t a good idea if you’re planning to pass your home onto your heirs.
But for some borrowers, having the ability to take money out of their house and use it to supplement their income can make a reverse mortgage a very useful tool.
What is a reverse mortgage?
A reverse mortgage is a type of home loan only available to people aged 62 or older. It’s for people who have gained a lot of equity in their home since originally buying it and may even have fully paid off their mortgage already.
A forward mortgage — which you probably think of as a regular mortgage — is a type of loan you’d use to buy a home. You make monthly payments to the lender until the home is paid off,
A reverse mortgage, on the other hand, is used after you’ve already bought the home. The lender pays you, and the money comes out of the equity you’ve acquired in the house. Over time, your debt increases.
A reverse mortgage is not the same thing as a home equity loan or a home equity line of credit. All three are tools for tapping into your home equity, but they operate differently.
How does a reverse mortgage work?
How much you’ll be able to borrow depends on your age, the current interest rate of the loan, and how much your home is worth.
The money you get from a reverse mortgage is tax-free. The IRS sees it as a loan, not as taxable income.
When the home is eventually sold (whether you’re living or dead), the proceeds go to the lender to pay off your debt from the reverse mortgage. Any additional money from the sale will go to you if you’re living, or to your estate if you’re dead.
If your heirs want to keep the property, then they can pay off the reverse mortgage themselves.
The 3 types of reverse mortgages
Home equity conversion mortgage (HECM)
This is the most common type of reverse mortgage. HECMs are a type of government-backed loan, meaning you’ll get it through a private lender and a federal agency (in this case, HUD) will insure it.
Since they’re the most common type of reverse mortgage, most of the specific guidelines we mention in this article are referring to HECMs. Other types of reverse mortgages have requirements that are set by individual lenders, not the government, so they can vary a lot.
Proprietary reverse mortgage
With a proprietary reverse mortgage (also known as a jumbo reverse mortgage), you borrow an amount that exceeds the HUD limit. This could be the case if your home is worth a lot of money and you’ve either paid off the original mortgage or have a low amount left to pay.
Proprietary reverse mortgages aren’t backed by the government. You’ll get one through a private lender.
These reverse mortgages sometimes have lower age limits than HECMs; borrowers as young as 55 may qualify, depending on the lender. But they’re often more expensive.
Single-purpose reverse mortgage
A single-purpose reverse mortgage only allows your funds to be used for one thing. For example, the lender may tell you the money can only go toward home repairs or property taxes.
These types of reverse mortgages are offered by some nonprofit organizations, or by local or state government agencies. They’re typically very affordable and enable older homeowners to keep up with their homes, make necessary home repairs, or afford their property taxes. But these loans can be hard to find.
Who qualifies for a reverse mortgage? Reverse mortgage requirements
Age requirements
You must be 62 or older to get a HECM reverse mortgage. If you live in the home with your spouse, then ideally, you’d both be at least 62 years old. But you do have options if one spouse is younger.
If you’re the older spouse, then you can be the sole borrower of the reverse mortgage. Your spouse will be referred to as the “non-borrowing spouse.” In this case, though, your younger spouse could lose the home if you die first, or have to pay off the mortgage when you die to avoid selling the home to pay off the lender.
Depending on the situation, your spouse might be able to keep living in the home after you die, but they would no longer receive the mortgage payments. Talk to your lender or a Department of Housing and Urban Development counselor about your options if your spouse is under age 62.
Credit requirements
HUD says that when you apply for a reverse mortgage, the lender will look at your income, assets, expenses, and credit. But there’s no minimum credit score requirement for these loans. They will make sure that you’ve been paying your taxes and insurance on time, though, and that you can continue to do so.
You can’t have a mortgage with a large balance on the property. You’ll generally need to have at least 50% equity in the home, meaning you can’t have a mortgage for more than half of what the house is worth.
Property type
Properties that are eligible for a reverse mortgage backed by HUD include:
- Single-family homes
- One- to four-unit properties where the borrower lives in one of the units
- HUD-approved condos
- Individual condo units that meet FHA requirements
- Manufactured homes that meet FHA requirements.
Occupancy requirement
Reverse mortgages are only available on primary residences. You can’t get a reverse mortgage on a second home or investment property.
Mandatory counseling
Prospective reverse mortgage borrowers must meet with a HUD-approved counselor.
Reverse mortgage loan limits
The maximum loan amount for reverse mortgages allowed by HUD is $1,149,825 in 2024.
But you may not be able to borrow this much. The amount you’ll be approved for depends on the age of the youngest borrower (or non-borrowing spouse), your current rate, and what your house is worth.
Ultimately, the amount you’ll be approved for will only be a portion of your home’s total value, even if you own it outright. You can’t get a reverse mortgage for 100% of what your home is worth.
Reverse mortgage payment plan options
Once you’re approved for a reverse mortgage, you’ll have several options for how and when to receive the funds:
- Tenure. Receive equal monthly payments for as long as you live in the home.
- Term. This is similar to a tenure plan in that you’ll receive the same amount each month, but it’s over a set period of time that you choose (such as 15 years).
- Line of credit. Rather than receiving monthly payments, you can borrow money as needed. You’ll pay an adjustable rate, and you’ll only pay interest on the amount you use from the line of credit.
- Modified tenure. This option combines a line of credit with the standard tenure option, giving you a set monthly payment for as long as you’re in the home.
- Modified term. This is like the modified tenure option, but it combines a line of credit with set monthly payments for an amount of time you choose.
- Lump sum. Receive the full amount when you close on your reverse mortgage.
Reverse mortgage rates
The mortgage rate you’ll pay for your reverse mortgage partly depends on the payment plan you choose.
If you choose a lump sum payment, you’ll pay a fixed rate, meaning your interest rate won’t change for as long as you have the loan.
For all the other payment plan options, you’ll take on an adjustable rate, which means your interest rate can change periodically.
Adjustable reverse mortgage rates are based on an index called the CME Term SOFR index. You’ll be notified by your lender when your interest rate changes.
Reverse mortgage closing costs
As with a regular mortgage, you’ll have to pay closing costs on a reverse mortgage. You may be able to roll closing costs into your monthly payments rather than pay them upfront. But this payment method means you’ll receive less in cash each month.
You can expect to pay the following closing costs:
- Mortgage insurance premiums: There’s a 2% MIP closing cost, then an annual MIP of 0.5% of the amount you’ve borrowed.
- Origination fees: Lenders can charge $2,500 or 2% of the first $200,000 of the property value plus 1% of any amount over that (whichever is greater). Fees can’t exceed $6,000.
- Real estate closing costs: You’ll pay fees to third parties for things like a home appraisal, home inspection, and credit checks.
There are other fees to keep in mind, too. Remember that you’re required to meet with a HUD counselor before closing on an HECM, and you’ll have to pay them. You’ll also pay interest and servicing fees to your lender, though they can’t charge more than $35 a month in servicing fees.
Reverse mortgage pros and cons
Pros
- More cash in retirement. Payments from a reverse mortgage can be useful if your retirement savings and Social Security checks just aren’t cutting it. If an extra source of income would help ease your budget worries or make your retirement more comfortable, a reverse mortgage could be worth it.
- You don’t have to make monthly payments. Unlike other types of loans that let you tap into your home’s equity, you don’t have to make monthly payments on a reverse mortgage. Instead, you or your estate will owe the full balance when you sell, move out, or die.
- You won’t need to pay back more than what the home is worth. If your home depreciates significantly in value, you could end up having a higher balance on your reverse mortgage than what your home is worth. If this happens, lenders can’t go after your assets for the remaining balance. So for example, if you borrow a total of $200,000 on a home that ends up selling for $180,000, you won’t owe the $20,000 difference. With a reverse mortgage, you’ll only owe what your home is worth at the time the loan becomes due.
- It allows you to stay in your home. Using the money in your home to pay off your existing mortgage, eliminate your monthly mortgage payment, and supplement your income makes it much easier for you to remain in your home and age in place.
- It’s tax-free money. Funds you receive from your reverse mortgage aren’t considered income, so you won’t pay taxes on them. This is in contrast with many of the other sources of income seniors rely on in retirement, such as traditional IRAs and 401(k)s.
“While it may seem like you are earning ‘income’ from the mortgage, the IRS does not view it that way,” says Levon L. Galstyan, a certified public accountant at Oak View Law Group. “You won’t owe more taxes on April 15 since reverse mortgage payments are treated as loan proceeds, not taxable income.”
Cons
- You need to have enough equity. To qualify for a reverse mortgage, you’ll need to either own your home outright (meaning you don’t have a mortgage on the property) or have paid down a “considerable amount,” according to HUD. Expect lenders to require at least 50% equity.
- You’ll still pay closing costs and mortgage insurance. You may pay origination fees, a mortgage insurance premium, and other closing costs (such as an appraisal, title search, or other fees).
- You’ll pay interest and fees over the life of the loan. In addition to upfront costs, you’ll also be charged interest on your balance, an annual mortgage insurance premium, and any servicing fees your lender charges. You’ll also still have to pay other non-mortgage housing costs, such as homeowners insurance, property taxes, and homeowners association dues.
- Non-borrowing spouses won’t continue receiving money after you die. If your spouse isn’t on the reverse mortgage and you die or move into a long-term healthcare facility, they won’t be eligible to continue receiving funds. However, they may be able to remain in the home and have the repayment of the mortgage deferred if they meet HUD guidelines.
- Your heirs will have to pay off the loan if they want to keep the home. For some homeowners, passing their property along to their heirs after they die is important, and getting a reverse mortgage complicates that. If your heirs want to keep the home, they’ll need another source of funds to pay off the mortgage.
Reverse mortgage alternatives
If you’re in need of extra funds but a reverse mortgage doesn’t make sense for your situation, you might instead try:
- A home equity loan or home equity line of credit. These types of home loans let you take equity out of your home and use the funds however you like, similar to a reverse mortgage. These loans can be good if for those who have a specific project or goal in mind for the money they’re taking out — such as making modifications or upgrades to the home. Plus, a home equity loan or HELOC lender may be able to offer you a better mortgage rate than you’d get with another type of loan, such as a personal loan.
- Refinancing your current mortgage. Refinancing replaces your existing mortgage with a new one. A traditional rate-and-term refinance can help lower your monthly payment if you’re able to snag a lower rate or lengthen your loan term. A cash-out refinance turns a portion of your equity into cash that you’ll get at closing. Refinancing can give you more wiggle room in your monthly budget or help you pay for a big expense, but do the math to be sure it actually makes sense for your situation. If you do decide to refinance, make sure to shop around with multiple mortgage refinance lenders — you don’t necessarily need to go with the lender you have your current mortgage with.
- Downsizing. If you’re having trouble affording your current housing costs, you might consider moving into a smaller, more affordable home.
Look out for reverse mortgage scams
Reverse mortgage borrowers are a common target for scammers. Fake lenders could come out of the woodwork to offer you a reverse mortgage that isn’t real, and they steal your money.
To avoid a scam, don’t respond to unsolicited emails or phone calls about reverse mortgages. Do your own research and approach a lender, instead of responding to a lender who approaches you.
Reverse mortgage frequently asked questions
What is the downside to a reverse mortgage?
One of the main downsides of getting a reverse mortgage is that you’ll be slowly reducing the amount of equity you have in your home, which reduces how much you’ll profit if you choose to sell the home.
Can you lose your house with a reverse mortgage?
If you become delinquent on your property taxes, violate the terms of the reverse mortgage, or fail to pay it back once the loan comes due, a reverse mortgage lender can foreclose on the house, and you could lose the property as a result.
Do you have to pay back a reverse mortgage?
Reverse mortgages need to be paid back when you sell the home or die.
What is a reverse mortgage in simple terms?
In simple terms, a reverse mortgage is basically the opposite of a regular mortgage: instead of you paying the lender each month, the lender pays you. These mortgages work like other types of loans that let you tap into your home’s equity, such as a home equity loan or HELOC.
Do you pay taxes on a reverse mortgage?
No, you don’t pay taxes on a reverse mortgage, since the money you’re getting is considered loan proceeds, not income.
Is a reverse mortgage a good idea for seniors?
Like other home equity tapping loan options, a reverse mortgage isn’t for everyone. But if you need the funds, it can be an important financial tool to help you achieve certain goals or care for yourself in retirement.